Huawei Joins Alcatel Reshaping Wireless Equipment Battle

By Adam Ewing and Marie Mawad -
Feb 27, 2013

Huawei Technologies Co. and Alcatel-
Lucent SA, challenging Ericsson (ERICB) AB’s leadership in the wireless
equipment market, are reshaping tactics around services to gain
a way into networks they’ve so far been shut out of.

Carriers coping with the explosion of data traffic and
slowing consumer spending have turned to equipment vendors to
reduce costs and improve network quality. That has boosted
demand for services contracts, at a time when anemic equipment
spending has weighed on infrastructure makers’ sales.

“We use the services business as a doorway to get into the
hardware business,” Leroy Blimegger, head of Shenzhen, China-
based Huawei’s assurance and managed services, said in an
interview. “That’s the trend in the industry.”

Services are increasingly the focus in an industry where
equipment has become commoditized and competition from Asia has
pushed prices lower. Managed services, a market whose components
range from fixing transmission stations to making new services
possible for consumers, will probably grow to $25 billion in
2017 from $14 billion last year, according to ABI Research.

Market Opening

Ericsson and Nokia Siemens Networks each had 27 percent of
the managed services market in 2011, with sales of about $3.2
billion each, according to ABI Research. After a late start,
Huawei is catching up, taking in $2.2 billion that year, and
it’s looking to sign deals in Europe to take more.

Wireless carriers are more willing to give up control of
their networks to reduce expenses so they can focus on building
new services. This is a strategic decision that is opening a
huge market for the equipment makers, said Gary Nugent, head of
corporate services at Paris-based Alcatel-Lucent. (ALU)

“There’s a new phenomenon in Europe and North America
around managing the customer experience” and these deals are
typically more lucrative, Nugent said in a phone interview.
“Customer experience is becoming a big sales argument for
carriers.”

In Europe, where Alcatel-Lucent predicts sales of network
equipment will be stable this year, the company is revamping its
strategy and looking at replicating its Latin American approach,
based on getting to know future clients’ networks by supplying
services first, to later win wireless contracts, its global head
of sales, Robert Vrij, said in an interview at the Mobile World
Congress in Barcelona this week.

Slim, Oi

Billionaire Carlos Slim’s America Movil (AMXL) SAB a year ago said
it picked Alcatel-Lucent to deploy 4G infrastructure in Latin
America. Brazil’s Oi also said last year it will buy equipment
from Alcatel-Lucent, among other vendors, to build its high-
speed fourth-generation network.

Services and software revenue at Alcatel grew 2.3 percent
last year to 4.56 billion euros ($6 billion), making 32 percent
of the total. During the year, the company decided to get out of
some unprofitable services contracts. Alcatel’s total sales
shrank 5.7 percent in 2012.

Nokia Siemens is also looking for more profitable service
contracts to lift earnings and has a focus on mobile broadband,
said Phillip Long, head of the company’s professional services
business. The company has been investing for years in network
operations centers and products, he said.

“We are selective in how we go to market with our managed
services portfolio,” he said. “Through half a dozen of our
delivery centers and local service organizations we support 750
million subscribers. So we’re a large player in that domain.”

‘Serious Competition’

“The hardware side of the business is declining,” said
Aditya Kaul, an analyst at ABI Research in London. “Huawei is
mostly dealing with basic field maintenance deals now, but it is
heavily investing,” which may pose “serious competition,”
Kaul said.

Huawei may overtake Alcatel-Lucent in market share this
year, according to ABI Research estimates.

Huawei is making investments to compete worldwide and has
opened global-operation centers in India and Romania, which can
manage the networks of multiple countries from a single
location. As Europe’s financial crisis caused Nokia Siemens and
Alcatel-Lucent to rethink their services strategy and withdraw
from less profitable deals, Huawei has been stepping in and
gaining new customers.

Narrowing Gap

Since its first managed services deal with Pacific
Bangladesh Telecom Ltd. in 2005, Huawei’s total service business
has grown about 30 percent each year on average, while its
managed services business jumped 70 percent on average, except
last year when the growth was 50 percent, said Blimegger.

“Ericsson may have more market share, but they started a
few years before we did,” he said. “The gap every year is
narrowing.”

Ericsson, the largest maker of mobile network equipment,
made almost 50 percent of its revenue from Global Services and
Support Solutions in 2012, up from 42 percent the previous year.

Ericsson and Nokia Siemens continue to dominate the
services market, ABI’s Kaul said. Western vendors have spent
years building their infrastructure to support this global push.
The two companies control more than half of the managed services
business, in which they had almost 60,000 workers in 2011.
Huawei is still a “niche” competitor with about 6,000 workers
in this business, Kaul said.

Labor Costs

Huawei’s employee costs are lower than those of European
and North American vendors, Gartner said in October. A
telecommunications technician in China costs less than a third
of one employed in the U.S or western Europe, it said.

While may give Huawei an advantage on some deals, Huawei’s
late entry into the market may make potential customers more
skeptical. Huawei lost a recent bid to manage services in India
for Reliance Communications Ltd. (RCOM) and may have been excluded
because it lacks experience in dealing with such a large
network, Kaul said. Alcatel and Ericsson each won a $1 billion
contract from Reliance this year.

“Huawei is certainly a threat and will be a strong
competitor in services,” said Joy Yang, an analyst at Gartner
in Shanghai. “Ericsson already has a huge installed base, but
with Alcatel and Nokia Siemens leaving some lower-margin
contracts and with so many service deal renewals happening now
in Europe, Huawei has a big opportunity.”